-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZTLarkyqPi67S2QGOe24iruhx98HhEqxKe38pwISjtkFRObawHDMgp8UTBBMMb7 q1M+5iPQ1N82tZpq9x3giw== 0000031224-96-000039.txt : 19961118 0000031224-96-000039.hdr.sgml : 19961118 ACCESSION NUMBER: 0000031224-96-000039 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTERN UTILITIES ASSOCIATES CENTRAL INDEX KEY: 0000031224 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041271872 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05366 FILM NUMBER: 96662589 BUSINESS ADDRESS: STREET 1: ONE LIBERTY SQ STREET 2: P O BOX 2333 CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6173579590 10-Q 1 EUA 3RD QUARTER 1996 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _________________ to ___________________ Commission File Number 1-5366 EASTERN UTILITIES ASSOCIATES (Exact name of registrant as specified in its charter) Massachusetts 04-1271872 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Liberty Square, Boston, Massachusetts (Address of principal executive offices) 02109 (Zip Code) (617)357-9590 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes...X.......No.......... Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding at October 31, 1996 Common Shares, $5 par value 20,435,997 shares PART I - FINANCIAL INFORMATION Item 1. Financial Statements EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED BALANCE SHEETS (In Thousands)
September 30, December 31, ASSETS 1996 1995 Utility Plant and Other Investments: Utility Plant in Service $ 1,048,216 $ 1,037,662 Less: Accumulated Provision for Depreciation and Amortization 347,865 324,146 Net Utility Plant in Service 700,351 713,516 Construction Work in Progress 20,504 7,570 Net Utility Plant 720,855 721,086 Investments in Jointly Owned Companies 71,638 70,210 Non-Utility Plant - Net 78,750 82,347 Total Plant and Other Investments 871,243 873,643 Current Assets: Cash and Temporary Cash Investments 6,566 4,060 Accounts Receivable, Net 83,093 84,376 Notes Receivable 26,446 18,663 Fuel, Materials and Supplies 14,338 16,516 Other Current Assets 8,880 11,804 Total Current Assets 139,323 135,419 Deferred Debits and Other Non-Current Assets 191,542 197,068 Total Assets $ 1,202,108 $ 1,206,130 LIABILITIES AND CAPITALIZATION Capitalization: Common Shares, $5 Par Value $ 102,180 $ 102,184 Other Paid-In Capital 221,101 220,730 Common Share Expense (3,926) (3,913) Retained Earnings 53,298 56,228 Total Common Equity 372,653 375,229 Non-Redeemable Preferred Stock - Net 6,900 6,900 Redeemable Preferred Stock - Net 26,928 26,255 Long-Term Debt - Net 423,373 434,871 Total Capitalization 829,854 843,255 Current Liabilities: Long-Term Debt Due Within One Year 12,511 19,506 Notes Payable 52,571 39,540 Preferred Stock Sinking Fund 50 50 Accounts Payable 29,442 35,769 Taxes Accrued 6,225 4,544 Interest Accrued 7,166 10,861 Other Current Liabilities 32,003 19,931 Total Current Liabilities 139,968 130,201 Deferred Credits and Other Non-Current Liabilities 91,288 91,934 Accumulated Deferred Taxes 140,998 140,740 Total Liabilities and Capitalization $ 1,202,108 $ 1,206,130 EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In Thousands Except Number of Shares and Per Share Amounts) Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 Operating Revenues $ 131,076 $ 143,333 $ 388,661 $ 428,036 Operating Expenses: Fuel 25,904 24,973 66,563 70,900 Purchased Power 27,391 30,577 86,007 94,032 Other Operation and Maintenance 44,090 44,199 134,031 139,456 Voluntary Retirement Incentive 0 0 4,505 Depreciation and Amortization 11,240 11,055 34,038 34,553 Taxes - Other than Income 5,807 5,001 18,216 16,043 Income Taxes - Current 2,113 5,097 8,915 9,171 - Deferred (Credit) 1,203 1,804 (742) 4,921 Total 117,748 122,706 347,028 373,581 Operating Income 13,328 20,627 41,633 54,455 Other Income - Net 5,800 4,119 12,200 11,235 Loss on Disposal of Cogeneration Operations (18,086) (18,086) Income Tax Impact of Loss on Disposal Of Cogeneration Operations 7,588 7,588 Income Before Interest Charges 19,128 14,248 53,833 55,192 Interest Charges: Interest on Long-Term Debt 8,438 9,593 25,707 28,911 Other Interest Expense 1,773 1,590 4,969 4,320 Allowance for Borrowed Funds Used During Construction (Credit) (472) (601) (1,457) (1,997) Net Interest Charges 9,739 10,582 29,219 31,234 Net Income 9,389 3,666 24,614 23,958 Preferred Dividends of Subsidiaries 578 582 1,735 1,743 Consolidated Net Earnings $ 8,811 $ 3,084 $ 22,879 $ 22,215 Weighted Average Number of Common Shares Outstanding 20,435,997 20,336,703 20,436,290 20,183,205 Consolidated Earnings Per Average Common Share $ 0.43 $ 0.15 $ 1.12 $ 1.10 Dividends Paid $ 0.415 $ 0.40 $ 1.23 $ 1.185 See accompanying notes to consolidated condensed financial statements. EASTERN UTILITIES ASSOCIATES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In Thousands) Nine Months Ended September 30, 1996 1995 CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 24,614 $ 23,958 Adjustments to Reconcile Net Income to Net Cash Provided from Operating Activities: Depreciation and Amortization 38,821 42,799 Deferred Taxes (333) (1,884) Non-cash (Gains)/Expenses on Sales of Investments in Energy Savings Projects 3,184 (2,232) Loss on Disposition of Cogeneration Projects 18,086 Investment Tax Credit, Net (905) (909) Allowance for Funds Used During Construction (254) (471) Collections and sales of project notes and leases receivable 5,891 16,312 Other - Net 6,793 6,873 Change in Operating Assets and Liabilities 7,610 (19,430 Net Cash Provided From Operating Activities 85,421 83,102 CASH FLOW FROM INVESTING ACTIVITIES: Construction Expenditures (49,662) (63,574 Collections on Notes and Lease Receivables of EUA Cogenex 3,198 2,392 Proceeds from Disposal of Cogeneration Assets 11,501 Increase in Other Investments (4,036) Net Cash (Used in) Investment Activities (50,500) (49,681 CASH FLOW FROM FINANCING ACTIVITIES: Issuances: Common Stock 4,520 Redemptions: Long-Term Debt (18,560) (5,664) Premium on Reacquisition and Financing Expenses (14) (60) EUA Common Share Dividends Paid (25,137) (23,899 Subsidiary Preferred Dividends Paid (1,735) (1,742) Net Increase (Decrease) in Short-Term Debt 13,031 (3,018) Net Cash (Used in) Financing Activities (32,415) (29,863 Net Increase in Cash and Temporary Cash Investments 2,506 3,558 Cash and Temporary Cash Investments at Beginning of Period 4,060 20,109 Cash and Temporary Cash Investments at End of Period $ 6,566 $ 23,667 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (Net of Capitalized Interest) $ 31,717 $ 30,096 Income Taxes $ 11,490 $ 6,596 Supplemental schedule of non-cash investing activities: Conversion of Investments in Energy Savings Projects to Notes and Leases Receivable $ 4,813 $ 14,158 See accompanying notes to consolidated condensed financial statements.
EASTERN UTILITIES ASSOCIATES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The accompanying Notes should be read in conjunction with the Notes to Consolidated Financial Statements incorporated in the Eastern Utilities Associates (EUA or the Company) 1995 Annual Report on Form 10-K and the Company's Quarterly Report on Form 10-Q for the periods ended March 31, and June 30, 1996. Note A - In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly its financial position as of September 30, 1996 and December 31, 1995, and the results of operations for the three and nine months ended September 30, 1996 and 1995 and cash flows for the nine months ended September 30, 1996 and 1995. Certain reclassifications have been made to prior period financial statements to conform to current period classifications. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. EUA occasionally makes projections of expected future performance or statements of its plans, objectives and new business opportunities which are forward-looking statements under federal securities law. Actual results could differ materially from those discussed and there can be no assurance that such estimates of future results could be achieved. Note B - Results shown above for the respective interim periods are not necessarily indicative of results to be expected for the fiscal years due to seasonal factors which are inherent in electric utilities in New England. A greater proportionate amount of revenues is earned in the first and fourth quarters (winter season) of most years because more electricity is sold due to weather conditions, fewer day-light hours, etc. Note C - Commitments and Contingencies: Recent Nuclear Regulatory Commission (NRC) Actions Millstone III: Montaup Electric Company (Montaup), the wholesale generation subsidiary of Eastern Edison, a wholly owned subsidiary of EUA, has a 4.01% ownership interest in Millstone III, an 1154-MW nuclear unit that is jointly owned by a number of New England utilities, including subsidiaries of Northeast Utilities (Northeast). Northeast is the lead participant in Millstone III, and on March 30, 1996, Northeast determined to shut down the unit following an engineering evaluation which determined that four safety-related valves would not be able to perform their design function during certain postulated events. The NRC has raised issues with respect to Millstone III and certain of the other nuclear units in which Northeast and its subsidiaries, either individually or collectively, have the largest ownership shares, including a 582-MW Nuclear unit owned by Connecticut Yankee Atomic Power Company (Connecticut Yankee), in which Montaup has 4.5% ownership share (see "Connecticut Yankee" Below). In July 1996 Northeast reported that it has been responding to a series of requests from the NRC seeking assurance that the Millstone III unit will be operated in accordance with the terms of its operating license and other NRC requirements and regulations and dealing with a series of issues that Northeast has identified in the course of these reviews. Providing these assurances and addressing these issues will be components of an Operational Readiness Plan (ORP) to be developed for the Millstone III unit. The ORP for Millstone III was submitted to the NRC on July 2, 1996 and is presently being implemented. On October 18 1996, the NRC informed Northeast that it will establish a Special Projects Office to oversee inspection and licensing activities at Millstone. The Special Projects Office will be responsible for (1) licensing and inspection activities at Northeast's Connecticut plants, (2) oversight of an independent corrective action verification program; (3) oversight of Northeast's corrective actions related to safety issues involving employee concerns, and (4) inspections necessary to implement NRC oversight of the plants' restart activities. On October 24, 1996 the NRC issued another order directing that prior to restart of Millstone III, Northeast submit a plan for disposition of safety issues raised by employees and retain an independent third-party to oversee implementation of this plan. This third-party oversight will continue until the situation is corrected. There is no estimate of how long this will take. Northeast Management has indicated it cannot presently estimate the effect these efforts will have on the timing of restarts or what additional costs, if any, these developments may cause. The most recent Northeast estimate of incremental costs related to the outage of Millstone III is approximately $68.0 million through December 1996. Montaup's share is $2.7 million, $1.7 million of which has been incurred through September. While Millstone III is out of service, Montaup will incur incremental replacement power costs estimated at $0.4 million to $0.8 million per month. Montaup bills its replacement power costs through its fuel adjustment clause, a wholesale tariff jurisdictional to the Federal Energy Regulatory Commission (FERC). However, there is no comparable clause in Montaup's FERC-approved rates which at this time would permit Montaup to recover its share of the incremental costs incurred by Northeast. EUA cannot predict the ultimate outcome of the NRC inquiries or the impact which they may have on Montaup and the EUA system. Montaup is also evaluating its rights and obligations under the various agreements relating to the ownership and operation of Millstone III. Connecticut Yankee: The Connecticut Yankee Nuclear Unit was taken off-line in July 1996 because of issues related to certain containment air recirculation and service water systems. In October, Montaup, as one of the joint owners, participated in an economic evaluation of Connecticut Yankee which recommended permanently closing the unit and replacing its output with less expensive energy sources. As a result of the analysis, work at the plant has slowed pending a final board decision, expected to occur in the fourth quarter of 1996. The preliminary estimate of the sum of future payments for the closing, decommissioning, and recovery of the remaining investment in Connecticut Yankee, assuming permanent shut down, is approximately $797 million. Montaup's share of the total estimated costs is $35.9 million. Montaup anticipates being able to fully recover its remaining investment and decommissioning costs in Connecticut Yankee, in which event there would be no adverse impact on earnings. Maine Yankee: On June 7, 1996, the NRC commissioned an independent Safety Assessment Team to assess the conformance of the Maine Yankee Atomic Power Station to its design and licensing basis. Montaup holds a 3.5% ownership interest in the Maine Yankee Unit. On October 7, 1996, the NRC released an Independent Safety Assessment (ISA) report. In evaluating the Plant's conformance to its licensing basis, the report concluded that Maine Yankee was in general conformance with its licensing basis although significant items of nonconformance were identified stemming from two closely related root causes: (1) economic pressure to be a low-cost energy provider had limited available resources to address corrective actions and some improvements and (2) a questioning culture was lacking, which had resulted in a failure to identify or promptly correct significant problems in areas perceived by Maine Yankee to be of low safety significance. A letter to Maine Yankee from the Chair of the NRC, accompanying the ISA report directed Maine Yankee to provide to the NRC its plans for addressing the root causes of the deficiencies identified by the ISA. The Plant's current allowed operating level may be limited to 90% of capacity until completion of the Plant's next planned refueling outage, which is now scheduled for September 1997. Maine Yankee cannot predict, however, whether or when the Plant will attain a 100-percent operating level, or the results of the ongoing investigations and reviews. General: Recent actions by the NRC, some of which are cited above, indicate that the NRC has become more critical and active in its oversight of nuclear power plants. EUA is unable to predict at this time, what, if any, ramifications these NRC actions will have on any of the other nuclear power plants in which Montaup has an ownership interest or power contract. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is Management's discussion and analysis of certain significant factors affecting the Company's earnings and financial condition for the interim periods presented in this Form 10-Q. Overview Consolidated Net Earnings for the quarter ended September 30, 1996 were $8.8 million compared to $3.1 million in the third quarter of 1995. The third quarter 1995 earnings include a one-time after-tax charge of $10.5 million, related to the loss on discontinuance of cogeneration operations by EUA Cogenex Corporation (EUA Cogenex), EUA's wholly owned energy services subsidiary. Net Earnings contributions by Business Unit for the third quarter of 1996 and 1995 were as follows (000's): Increase 1996 1995 (Decrease) Core Electric Business $9,915 $12,593 $(2,678) Energy Related Business* (899) 976 (1,875) Corporate (205) 13 (218) Subtotal 8,811 13,582 (4,771) Cogeneration Discontinuance (10,498) 10,498 Consolidated $8,811 $ 3,084 $ 5,727 ======= ======== ======== *Excluding the 1995 EUA Cogenex discontinuance of cogeneration operations. Consolidated Net Earnings for the nine months ended September 30, 1996 were $22.9 million compared to $22.2 million for the same period of 1995. The year-to-date 1996 earnings include a one-time, after-tax charge to earnings of $3.7 million recorded by EUA Cogenex in June 1996. The year-to-date 1995 earnings include a $2.7 million, after-tax charge recorded in June 1995 for a voluntary retirement incentive offer as well as the charge for the 1995 discontinuance of cogeneration operations. Net Earnings contributions by Business Unit for the first nine months of 1996 and 1995 were as follows (000's): Increase 1996 1995 (Decrease) Core Electric Business* $28,528 $32,297 $(3,769) Energy Related Business** (1,318) 2,948 (4,266) Corporate (659) 215 (874) Subtotal 26,551 35,460 (8,909) Voluntary Retirement Incentive (2,747) 2,747 Cogeneration Discontinuance (10,498) 10,498 June 1996 EUA Cogenex charge (3,672) (3,672) Consolidated $22,879 $22,215 $ 664 ======= ======= ======== *Excluding the 1995 VRI charge. **Excluding the 1995 EUA Cogenex discontinuance of cogeneration operations and the June 1996 EUA Cogenex charge. Core Electric Business: The earnings contribution of this Business Unit, net of the 1995 VRI charge, decreased in both the third quarter and year-to-date periods of 1996. These decreases are primarily the result of expenses related to an unusual number of severe storms which struck our retail service territory in the first nine months of this year, increases in property tax and legal expenses, outage costs of the Millstone III Nuclear Generating Station (in which we are a 4.01% joint owner) and, for the third quarter, a decrease in kilowatthour sales. Offsetting these negative impacts, somewhat, was lower interest expense resulting from maturing debt issues in 1995. Energy-Related Business: Net of the one-time charges listed in the preceding table, EUA Cogenex incurred losses of $0.9 million and $1.6 million, respectively, in the three and nine month periods ended September 30, 1996, a decrease of $1.5 million and $4.1 million, respectively, from its earnings contributions in the same periods of a year ago. The virtual elimination of utility sponsored DSM programs and difficulties in closing project proposals have negatively impacted EUA Cogenex results. Refocusing of the Cogenex sales efforts are not expected to have a positive impact on Cogenex results until the latter part of 1997. Year-to-date losses generated by EUA Energy Investment Corporation decreased slightly in comparison with the first nine months of 1995. However, the TransCapacity Limited Partnership and the BIOTEN partnership have progressed more slowly than expected. TransCapacity L.P. customer installations continue to be slower than anticipated while testing of BIOTEN's prototype biomass-fueled generating unit, though very encouraging to date, has taken longer than anticipated. Corporate: The change in earnings of the Corporate business unit is primarily a result of increased short-term debt interest expense in 1996. Operating Revenues Operating Revenues for the third quarter of 1996 decreased by approximately $12.3 million when compared to the same period of 1995. Revenues by Business Unit operations were as follows (000's): Three Months Ended September 30, Increase 1996 1995 (Decrease) Core Electric Business $118,211 $124,568 $ (6,357) Energy Related Business 12,865 18,765 (5,900) Corporate 0 0 0 Consolidated $131,076 $143,333 $(12,257) ======== ======== ========= The change in Core Electric Business revenues reflects recoveries of decreased purchased power and conservation and load management (C&LM) expenses and the negative impact of a 2.5% kWh sales decrease, slightly offset by recoveries of increased fuel expense. (see Operations Expense below). EUA Cogenex revenues, which account for virtually all of the Energy Related Business Unit revenues, decreased by $5.9 million in this year's third quarter compared to the same period of 1995. This decrease was due primarily to lower project sales of approximately $5.4 million, decreased EUA Nova revenues of $1.6 million offset by increased revenues of EUA Highland. Operating Revenues for the first nine months of 1996 decreased by $39.4 million or 9.2% when compared to the same period of 1995. Operating Revenues by Business Unit for the first nine months of 1996 and 1995 were as follows (000's): Nine Months Ended September 30, Increase 1996 1995 (Decrease) Core Electric Business $347,746 $366,523 $(18,777) Energy Related Business 40,915 61,513 (20,598) Corporate 0 0 0 Consolidated $388,661 $428,036 (39,375) ======== ======== ======= Core Electric Business revenues decreased by $18.8 million due primarily to lower purchased power, fuel and C&LM expense recoveries aggregating $18.1 million and a decrease in other operating revenues of approximately $2.0 million. These decreases were offset somewhat by a 1.2% increase in kWh sales. EUA Cogenex revenues decreased by $20.6 million due primarily to lower project sales of approximately $14.2 million, lower cogeneration revenues of approximately $5.5 million related to the September 1995 discontinuation of cogeneration operations and decreased EUA Nova revenues of $6.1 million. These decreases were offset somewhat by the increased revenues aggregating $5.0 million from EUA Highland, EUA Citizens and EUA Day. KWH Sales Primary kWh sales of electricity by EUA's Core Electric Business Unit decreased by 2.5% in the third quarter of 1996 compared to the same period last year due to significantly milder weather. This decrease was led by decreases of 4.2% and 3.3% in the residential and commercial customer classes, which are typically more weather sensitive. Year-to-date September 30, 1996 sales of electricity increased 1.2% compared to the same period of 1995. The first and second quarter increases were mitigated by the third quarter's disappointing results. Operations Expense Fuel expense of the Core Electric Business increased by approximately $900,000 or 3.7% for the third quarter and decreased by $4.3 million or 6.1% for the year-to-date periods of 1996, respectively, as compared to the same periods of 1995. The third quarter change was impacted by a 4.2% increase in total energy generated and purchased, partially offset by 2.4% decrease in the average cost of fuel. Because the EUA System requirements decreased in the third quarter, sales to the New England Power Pool (NEPOOL) increased. These NEPOOL sales recover fuel costs only and have little earnings impact. The year-to-date period was impacted by a 9.5% decrease in the average cost of fuel offset by a 3.3% increase in total energy generated and purchased. Purchased Power demand expense for the third quarter of 1996 decreased $3.2 million or 10.4% and $8.0 million or 8.5% for the nine months ended September 30, 1996. The third quarter change was primarily due to the impact of a prior period refund of approximately $2.0 million from the Pilgrim Nuclear unit, subsequently refunded to retail customers, and decreased billings from the Ocean State Power Project, offset somewhat by increased billings of the Yankee nuclear units. The year-to-date decrease is due primarily to the impact of lower billings of approximately $3.9 million from the Pilgrim nuclear unit, including the previously mentioned refund, and decreased billings from the Ocean State Power Project and the Yankee nuclear units aggregating $3.1 million. Other Operation and Maintenance expenses for the third quarter were virtually flat and decreased by $5.4 million for the nine months ended September 30, 1996 compared to the same periods in 1995. Direct expenses of the Core and Corporate Business units increased by $1.7 million and $3.4 million in the third quarter and year-to-date periods of 1996, respectively, as compared to the same periods of a year ago. These changes are due primarily to incremental storm expenses, costs related to the electric industry restructuring activities and increased assessments by FERC aggregating $1.6 million and $3.6 million for the respective periods. Indirect expenses, items over which there is limited short-term control or items which are fully recovered in rates, increased by $0.7 million and decreased by $1.5 million in the third quarter and year-to-date periods of 1996, respectively, as compared to the same periods of 1995. The third quarter change was due to increased FAS106 expense of $0.8 million and increased jointly owned unit expenses of $1.4 million. Offsetting these increases somewhat was a decrease in C&LM expenses of $1.2 million. The year-to-date decrease includes $4.5 million of lower C&LM expenses somewhat offset by increased legal & FAS106 expenses aggregating $3.3 million. Expenses of the Energy Related Business unit decreased by $2.6 million and $7.2 million for the third quarter and year-to-date periods of 1996, respectively. The third quarter decrease was due primarily to decreased EUA Cogenex project sales related expenses of $4.5 million and decreased EUA Nova costs of goods sold of $1.0 million offset somewhat by increased expenses of EUA Highland and EUA Citizens aggregating $3.0 million. The year-to-date change included decreases in EUA Cogenex sales related expenses of $8.4 million, decreased EUA Nova costs of goods sold of $4.4 million and decreased cogeneration related expenses of $4.6 million, related to the September 1995 discontinuation of that business line. EUA Energy Investment Corporation expenses decreased by $1.2 million in the year-to-date period. These year-to-date decreases were offset somewhat by the June 1996 EUA Cogenex charge of $5.9 million and $5.7 million of increased expenses related EUA Highland and EUA Citizens. Taxes Other Than Income Taxes other than income increased approximately $800,000 and $2.2 million in the three month and year-to-date periods ended September 30, 1996, respectively, compared to the same periods of 1995. The reversal of previously over-accrued property taxes in the second and third quarters of 1995 and lower Rhode Island gross receipts taxes, related to a lower rate and lower revenues were primarily responsible for these changes. Income Taxes The effective income tax rate for the first nine months of 1996 increased to 35.2% from 30.2% for the same period of 1995 due mainly to a decrease in state income tax benefits. Other Income (Deductions) - Net Other Income and (Deductions)-Net increased $1.7 million for the third quarter and $1.0 million for the year-to-date period as compared to the same periods of 1995. Approximately $1.7 million of these increases is due to the sale of Seabrook II equipment jointly owned by Montaup. The year to date increase was partially offset by the impact of the write-off of Cogenex's AYP Capital and Westar joint venture start-up costs, included in the June 1996 $5.9 million charge. Interest Charges Net interest charges for the third quarter and nine months ended September 30, 1996 decreased approximately $800,000 and $2.0 million respectively, as compared to the same periods of 1995. These decreases were primarily due to the December 1995 maturity of $25 million of 9-9 1/4% Unsecured Medium Term Notes and $10 million of 8.9% First Mortgage and Collateral Trust Bonds of Eastern Edison Company, offset somewhat by higher interest expense related to increased short-term debt. Liquidity and Sources of Capital The EUA's system's need for permanent capital is primarily related to investments in facilities required to meet the needs of its existing and future customers. Traditionally, cash construction requirements not met with internally generated funds are financed through short-term borrowings which are ultimately funded with permanent capital. At September 30, 1996, EUA System companies maintained short-term lines of credit with various banks aggregating approximately $150 million. Outstanding short-term debt at September 30, 1996 and December 31, 1995 by Business Unit was as follows (000's): September 30, 1996 December 31, 1995 Core Electric Business $ 0 $ 6,761 Energy Related Business 27,237 14,421 Corporate 25,334 18,358 Consolidated $52,571 $39,540 ======= ======= For the nine months ended September 30, 1996 internally generated funds available after the payment of dividends amounted to approximately $52.9 million while the EUA System's cash construction requirements amounted to approximately $49.7 million for the same period. Various laws, regulations and contract provisions limit the use of EUA's internally generated funds such that the funds generated by one subsidiary are not generally available to fund the operations of another subsidiary. Electric Utility Industry Restructuring The electric industry is in a period of transition from a traditional rate regulated environment to a competitive marketplace. While competition in the wholesale electric market is not new, electric utilities are facing impending competition in the retail sector. On March 5, 1996 the Rhode Island Public Utility Commission (RIPUC) required electric utilities subject to their jurisdiction to file electric industry restructuring plans. On April 19, 1996 both Blackstone and Newport filed a restructuring plan called "Choice and Competition", described below. Hearings on the restructuring plans submitted to the RIPUC were to have started on August 12, 1996. In view of the restructuring legislation (described below) passed into law on August 7, 1996, however, the RIPUC terminated its restructuring proceedings. On August 7, 1996 the Governor of Rhode Island signed into law the Utility Restructuring Act of 1996 (URA). The URA provides for customer choice of electricity supplier commencing July 1, 1997 for large manufacturing customers, certain new commercial and industrial customers, and State of Rhode Island accounts. Load, accounting for no more than 10% of total electric distribution company's kWh sales is to be released to retail access under this provision. An additional 10% of kWh sales is to be released to retail access by permitting municipal and smaller manufacturers to choose an electricity supplier commencing January 1, 1998. By July 1, 1998 or sooner, all customers will have retail access. This legislation provides for recovery of "stranded costs" through a non-by-passable transition charge initially set at 2.8 cents per kWh. The transition charge covers costs of regulatory assets; nuclear decommissioning; above market payments to power suppliers; and depreciated generation net of its market value. Nuclear decommissioning costs and above market payments to power suppliers will be reconciled to actual costs annually and the transition charge will be spread over the period from July 1, 1997 through December 31, 2009. The implementation of the URA will require approvals from applicable regulatory agencies, including the Federal Energy Regulatory Commission (FERC), the RIPUC, and the Securities and Exchange Commission. EUA believes that the URA settles much of the uncertainty regarding "stranded cost" recovery related to serving the customers of Blackstone and Newport. In August 1995, the Massachusetts Department of Public Utilities (MDPU) issued an order enumerating principles that describe the key characteristics of a restructured electric industry and provides for, among other things, customer choice of electric service providers, services, pricing options and payment terms, an opportunity for customers to share in the benefits of increased competition, full and fair competition in the generation markets and incentive regulation for distribution services where regulation will still exist. This order sets out principles for the transition from a regulated to a competitive industry structure and identifies conditions for the transition process which will require investor-owned utilities to unbundle rates, provide consumers with accurate price signals and allow customers choice of generation services. The order also provides, in principle, for the recovery of net, non-mitigable stranded costs by investor-owned utilities resulting from the industry restructuring. Each Massachusetts investor-owned utility is required to file restructuring proposals for moving from the current regulated industry structure to a competitive generation market. An initial group of utilities was required to file their proposals in February 1996. The second group is required to file within three months of the MDPU's orders on the first group of submissions. Eastern Edison Company filed its proposal, "Choice and Competition" (see below) with the first group of proposals. On March 15, 1996, the MDPU issued a Notice of Inquiry (NOI) Rulemaking on electric industry restructuring. The NOI incorporated by reference the restructuring proposals previously submitted pursuant to the MDPU's earlier order. In its NOI order the MDPU indicated that it planned to issue draft rules to provide more specific guidance on the framework of a restructured electric industry. On May 1, 1996 the MDPU issued its proposed rules for the restructuring of the electric industry. The MDPU stated the rules are intended to reduce electricity costs over time and provide broad customer choice of electric supplier promoting full and fair competition in the generation of electricity. These proposed rules, which amplify the principles set forth in the August 1995 order, were issued for public comment and hearing. Final rules were originally scheduled to be issued in September 1996. On August 9, 1996 the MDPU issued a notice extending the issuance date of the final rules. The MDPU goal is to issue final rules by the end of the calendar year 1996. The May 1st proposed rules provide for, among other things: - an independent system operator of the regional transmission system in New England operating within established reliability standards and a power exchange which would facilitate a short-term pool for energy transactions; - functional separation of electric companies into generation, transmission and distribution corporate entities; - a "reasonable" opportunity for recovery of net, non- mitigable stranded costs periodically subject to some degree of reconciliation; - a price cap system for performance based regulation of electric distribution companies; - distribution company obligation to provide electric distribution service to all customers within its service territory; - environmental protection and support for renewable energy resources and energy efficiency; - implementation of unbundled rates beginning January 1, 1997 and a competitive generation market by January 1, 1998; EUA participated in hearings held during June and July of 1996, and on August 2, 1996, filed written comments addressing restructuring issues. In its notice of August 9, 1996, the MDPU encouraged stakeholders to work together toward consensual resolution of restructuring issues. EUA is currently engaged in settlement negotiations. One Massachusetts electric utility company has submitted its offer of settlement on restructuring issues to the MDPU. EUA cannot predict the ultimate outcome of the restructuring process. In January 1996, EUA unveiled its preliminary proposal for a restructured electric utility industry called "Choice and Competition" and began discussions with collaborative groups in both Rhode Island and Massachusetts consisting of other utilities, industrial users, environmental groups, governmental agencies and consumer advocates. The plan proposed, among other things: choice of power supplier by all customers as early as January 1998; open access transmission services; performance based rates for electric distribution services; all utility generation competing for power sales; and a transition charge allowing regional utilities the opportunity to recover, among other things, the costs of past commitments to nuclear and independent power. The keystone to "Choice and Competition" was the adoption of common electric utility restructuring implementation for the New England states operating with the region's power pool. As different restructuring initiatives surfaced from state regulatory agencies and state legislatures, it became apparent that a New England region-wide approach to restructuring would be unlikely. Thus, major elements of the "Choice and Competition" proposal have been substantially modified to reflect that state by state, rather than regional, plans will be adopted. Historically, electric rates have been designed to recover a utility's full costs of providing electric service including recovery of investment in plant assets. Also, in a regulated environment, electric utilities are subject to certain accounting rules that are not applicable to other industries. These accounting rules allow regulated companies, in appropriate circumstances, to establish regulatory assets and liabilities, which defer the current financial impact of certain costs that are expected to be recovered in future rates. EUA believes that its Core Electric operations continue to meet the criteria established in these accounting standards. However, the potential exists that the final outcome of state and federal agency determinations could require EUA to no longer follow these accounting rules. Current or future regulatory proposals regarding the electric delivery business and the recovery of EUA's utility plant, stranded investment, and regulatory assets could trigger the discontinuance of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS71). Should it be required to discontinue the application of FAS71, EUA would be required to take an immediate write down of the affected assets in accordance with FAS101, "Accounting for the Discontinuation of Application of FAS71". In addition, if legislative or regulatory changes and/or competition result in electric rates which do not fully recover the company's costs, a write-down of plant assets could be required pursuant to Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS121) issued in March 1995, effective for fiscal year 1996. PART II - OTHER INFORMATION Item 1. Legal Proceedings On December 15, 1995, Eastern Edison exercised its right to terminate a Power Purchase Agreement (the PPA) entered into with the Meridian Middleboro Limited Partnership (MMLP) and a related entity on September 20, 1993. In February and May of 1996, MMLP made demand for over $25 million under the termination provision of the PPA. On June 17, 1996, Eastern Edison responded to MMLP's demand stating that only approximately $170,000 was due under the termination provision. On July 18, 1996, Eastern Edison filed a declaratory judgement action in Suffolk Superior Court in Boston, Massachusetts against MMLP seeking a declaration of the rights of the parties under the PPA. MMLP's response to the complaint, filed on August 8, 1996, included counter claims in excess of $20 million and a request for treble damages. In response to the counter claim, Eastern Edison paid MMLP $191,828 as the amount Eastern Edison considered to have been owed to MMLP. The Company intends to vigorously defend itself from the counter claims. The Company cannot determine the outcome of this proceeding at this time. Item 3. Defaults Upon Senior Securities As a result of the June 1996 $5.9 million charge to earnings and lower than anticipated sales, EUA Cogenex was out of compliance with the interest coverage covenant contained in certain of its unsecured note agreements and therefore EUA Cogenex was in default under said note agreements. EUA Cogenex has reached agreement with lenders to modify the interest coverage covenant contained in these note agreements through June 30, 1997 and to waive the default created by the June 1996 charge. Item 5. Other Information On April 24, 1996, the FERC issued orders on its March 24, 1995 Notice of Proposed Rulemaking (NOPR). FERC's purpose in proposing the new rules was to encourage competition in the bulk power market. The FERC's April 24th actions include: - order No. 888, a final rule requiring open access transmission and requiring all public utilities that own, operate or control interstate transmission to file tariffs that offer others the same transmission services they provide themselves, under comparable terms and conditions. Utilities must take transmission service for their own wholesale transactions under the terms and conditions of the tariff; - recovery of prudently incurred stranded costs by public utilities and transmitting utilities; - order No. 889, a final rule requiring public utilities to implement standards of conduct and an Open Access Same-time Information System (OASIS). Utilities must obtain information about their transmission the same way as their competitors through the OASIS; - a Notice of Proposed Rulemaking (NOPR) requesting comment on replacing the single tariff contained in the final open access rule with a capacity reservation tariff that would reveal how much transmission is available at any given time. Open-access transmission tariffs for point-to-point and network service filed with FERC by Montaup in February 1996 have been approved and became effective April 21, 1996 for a period of at least one year. These tariffs are in compliance with FERC's April 24th rulings. EUA remains committed to achieving a fair and equitable transition to a competitive electric utility marketplace. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K - None filed in the quarter ended September 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Eastern Utilities Associates (Registrant) Date: November 13, 1996 /s/ Clifford J. Hebert, Jr. Clifford J. Hebert, Jr., Treasurer (on behalf of the Registrant and as Principal Financial Officer) EX-27 2 FDS
OPUR1 1000 9-MOS DEC-31-1996 SEP-30-1996 PER-BOOK 720855 150388 139323 121216 70326 1202108 102180 217175 53298 372653 26928 6900 423373 0 52571 0 12511 50 0 0 307122 1202108 388661 8173 338855 347028 41633 12200 53833 29219 24614 1735 22879 25137 25707 85421 1.12 0
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